One "Option" to Trade the Summer Doldrums

Apr. 29, 2010 2:01 PM ET

Spring is here in Vermont, well, almost. The recent two feet that resides outside my window is Old Man Winter's last attempt at redemption after a poor showing this past winter. The market has essentially rallied for two straight months, but May is upon us. and we have all heard the old adage "sell in May and go away'. Here are just a few stats that tend to back-up the phrase spoken frequently among traders and Wall Street over the past few weeks.

May is historically one of the weaker performing months. It is something to consider over the intermediate-term in this already overextended market. I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if actually backed up typical range-bound summer months also known as the “summer doldrums”.

Jan. - 1.4%

Feb. - (-0.2%)

Mar. - 1.0%

Apr. - 1.3%

May - 0.3%

Jun. - 0.2%

Jul. - 0.9%

Aug. - 0.0%

Sep. - (-0.6%)

Oct. - 0.9%

Nov. - 1.8%

Dec. - 1.7%

The Stock Trader’s Almanac states that a $10,000 investment compounded to $544,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

Keep this in mind as we move into the summer months. Corrections happen. Flat periods happen. The market can’t continue to advance in this manner without corrections and lengthy consolidation periods. This is the nature of the market. Consider learning alternative investment strategies as a way to diversify your current portfolio so that you are better equipped in any market environment, bullish bearish or neutral. Over the next few weeks I will mention some of my favorite strategy-related books that will hopefully assist you on your journey to becoming a more knowledgeable and in turn, confident investor.

So, the question is, how can we make money during the historically flat period from May-October. Well, look no further than an Iron Condor Strategy. An iron condor performs best during a range-bound environment. It never hurts to learn an alternative investment strategy to see if it meets your risk profile and more importantly, if it can help you achieve a higher potential return in your overall portfolio. The strategy is not a “get rich quick” strategy and it has some obvious risks like any other leveraged investment strategy.

However, risks can be reduced in many ways, position sizing, defined stop-loss, etc. But, another way is to limit short iron condor positions to particular expiration cycles. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. If you think that history will repeat itself this year then you might want to investigate an Iron Condor Strategy that fits your risk profile.

Stay tuned for more info on Iron Condors and how I plan to implement them into my Options Portfolio on the website.